TAX TREATMENT OF LIFE INSURANCE AND ANNUITIES

Question 1

what is the effect of an outstanding loan if the insured dies?

Answer 1

the death benefit will be reduced by the loan amount and any interest owed.

Question 2

T or F: dividends are treated as a return of overpaid premium, and re not taxable when returned to policy owners.

Answer 2

true

Question 3

a client who contributed $100,000 to an annuity dies when it is wroth $200,000. what is her death benefit?

Answer 3

$200,000. the death benefit of an annuity is the greater of contributions or the account value at death.

Question 4

in a qualified annuity, how is the payout taxed?

Answer 4

the entire payout is taxed as ordinary income, since the annuity was funded with pre-tax dollars

Question 5

are variable life insurance loans taxable?

Answer 5

no, but interest is charged to the policyholder

Question 6

T or F: individual life insurance premiums are generally paid with pre-tax dollars

Answer 6

false. individual life insurance premiums are generally paid with after-tax dollars

Question 7

does the cash value of a MEC grow on a tax-deferred basis?

Answer 7

yes, as long as money remains inside the contract, MEC cash value grows tax-deferred. However, withdrawls are taxable

Question 8

what is the typical cost basis for a qualified retirement plan?

Answer 8

$0, since qualified plans are typically funded on a pre-tax basis

Question 9

what is another name for all of the deceased’s assets?

Answer 9

the estate

Question 10

a nonqualified annuity allows for _______ contributions and the annuity value grows on a _____ basis

Answer 10

after-tax contributions, tax-deferred basis

Question 11

the cost basis of a cash value contract consists of premiums paid for the ____ policy, but not ____

Answer 11

base policy but not the riders

Question 12

are life insurance death benefits taxable?

Answer 12

no, they are tax free

Question 13

the death benefit provided by a qualified annuity is ____ to the beneficiary

Answer 13

taxable

Question 14

any interest earned on dividends left to accumulate with interest would be taxable as ______

Answer 14

ordinary income

Question 15

in a non-qualified annuity, how is the payout taxed?

Answer 15

only the earnings portion is subject to tax as ordinary income

Question 16

can a policy classified as a MEC ever be classified as a “non-MEC” policy

Answer 16

no, once an MEC, always an MEC

Question 17

T or F: distributions from an MEC are taxed on a first-in/first-out (FIFO) basis

Answer 17

false, distributions from an MEC are taxed on a LIFO (last-in/first-out)

Question 18

a premature distribution penalty of ___ % is assessed against annuity withdrawals taken prior to age ______

Answer 18

10% at age 59 1/2.

Question 19

dividends are paid by a _____ company

Answer 19

a mutual company

Question 20

which annuity allows for a pre-tax contribution - qualified or nonqualified?

Answer 20

a qualified annuity

Question 21

the cash value grows within a contract on a _____ basis

Answer 21

a tax-deferred basis

Question 22

distributions from a qualified plan are taxed at ____ rates

Answer 22

ordinary income rates

Question 23

how is a nonqualified annuity benefit taxed?

Answer 23

the benefit is taxed on a LIFO basis

Question 24

what does MEC stand for

Answer 24

modified endowment contract

Question 25

estate taxes comprise both ___ and ____ taxes

Answer 25

state and federal taxes

Question 26

how is the death benefit on a life insurance policy taxed?

Answer 26

the death benefit is always received by the beneficiary on a tax-free basis

Question 27

what type of annuity may be used as a platform for an IRA?

Answer 27

a qualified annuity

Question 28

a qualified annuity allows for _____ contributions and the annuity value grows on a ______ basis

Answer 28

pre-tax contributions, tax-deferred basis.

Question 29

is the death benefit of an annuity included in a deceased client’s estate?

Answer 29

yes. it becomes part of the estate and any amount over the cost basis may be taxable to the beneficiary

Question 30

if no beneficiary is listed or alive upon an insured’s death, a death benefit will be payable to the insured’s _____

Answer 30

estate

Question 31

when paid to a beneficiary, is the death benefit from an MEC-classified policy taxable?

Answer 31

no

Question 32

the death benefit received by a beneficiary is received ____

Answer 32

tax free

Question 33

are life insurance death benefits included in the value of the deceased insured’s estate?

Answer 33

yes

Question 34

in a nonqualified annuity, how is a single distribution taxed?

Answer 34

earnings first, LIFO

Question 35

to be excluded from a person’s estate, a piece of property must be sold within ___ years of death

Answer 35

3 years

Question 36

a policy is considered an MEC based on the ____ pay test

Answer 36

7 day pay test

Question 37

if classifid as an MEC, distributions from the policy will be considered _____

Answer 37

taxable as income

Question 38

what is the dollar limit that may be contributed annually to a nonqualified annuity?

Answer 38

there is no contribution limit

Question 39

upon policy surrender, any cash value in excess of premiums paid will be taxable as ____

Answer 39

ordinary income

Question 40

Joan invests $15,000 in a qualified annuity. At age 64, she withdrawals all $22,000. what’s Joan’s basis and what’s taxed?

Answer 40

her basis is zero, since the annuity is qualified (funded pretax) and the entire $22,000 is taxed as ordinary income

Question 41

is there a tax consequence to taking out a loan against a policy’s cash value?

Answer 41

no, there are no tax consequences

Question 42

interest earned is always ___

Answer 42

interest earned is always taxable

Question 43

what rule states that property must be sold within 3 years prior to death to eliminate inclusion in a person’s estate

Answer 43

the transfer of value rule

Question 44

the cash value of a whole life contract usually begins to show a value sometimes in the _____ year following issue

Answer 44

3rd year

Question 45

T or F: premiums paid for individual life insurance are not deductible

Answer 45

true

Question 46

name four items that may be included in a persons’ estate

Answer 46

real and personal property, life death benefits, annuity values, retirement funds, and ownership rights in real property

Question 47

what technique may be used to roll assets from one annuity to another without taxation

Answer 47

a 1035 exchange

Question 48

describe a modified endowment contract

Answer 48

a life insurance policy in which the premiums paid are not in proportion to the death benefit provided

Question 49

a negative tax consequence may be created when the cash value policy is ______

Answer 49

surrendered

Question 50

premature distributions from an MEC will be subject to ______ and a _____ % IRS penalty

Answer 50

a taxation and a 10% IRS penalty

Question 51

in an MEC policy, premiums paid during the first ___ years of the policy exceed what’s needed to fund a ___ -pay life plan?

Answer 51

7 years, 7-pay life plan

Question 52

distributions from an MEC are considered premature if taken prior to age ______

Answer 52

59 1/2

Question 53

list some of the taxable distributions from an MEC

Answer 53

cash value surrender, dividends received, and policy loans

Question 54

the term MEC is a ____ of a life insurance contract, according to the IRS

Answer 54

classification

Question 55

which annuity is funded with after-tax dollars – qualified or nonqualified?

Answer 55

non-qualified annuity

Question 56

joe’s policy has a cash balue of $30,000 and his premiums were $28,000 if he surrenders the policy, what is taxable?

Answer 56

the cash value that exceeds premiums paid for the base policy would be taxable, $2,000

Question 57

what percentage of income from a qualified plan is typically taxable

Answer 57

100% since qualified plans are normally funded with pre-tax funds and have zero cost basis

Question 58

are dividend returns on a life insurance policy ever guaranteed?

Answer 58

no

Question 59

_____ is the equity that grows within a whole life policy

Answer 59

cash value

Question 60

what percentage of the benefit received from a qualified annuity is subject to taxation

Answer 60

100% since the annuity is funded with pre-tax dollars

Question 61

what occurs when an insured dies and his policy has an outstanding load?

Answer 61

the loan amount and any interest owed will be subtracted from the death benefit

Question 62

what occurs when an insured dies and his policy has an outstanding loan?

Answer 62

the loan amount and any interest owed will be subtracted from the death benefit

Question 63

ann invests $15,000 in a nonqualified annuity. at age 64, she withdraws all $22,000. what’s taxed?

Answer 63

her basis is $15,000. annuity is funded after-tax and the $7,000 of earnings would be taxed as ordinary income.

Question 64

a client who contributed $100,000 to an annuity dies when it is worth $50,000. what is the death benefit

Answer 64

$100,000. the death benefit on an annuity is the greater of contributions or the account value at death